Investigation Part 2: South Dakota outsourced management and auditing of COVID relief grants

The state Bureau of Finance and Management is not conducting its own auditing of individual grant applications or grants awarded under the Coronavirus Relief Fund, according to Colin Keeler, director of financial systems in the department.

The state hired an independent firm to manage both the application and award process that distributed millions in federal funds aimed at helping South Dakota businesses and healthcare facilities stay afloat during the worst of the pandemic.
A second firm was hired by the state to conduct monitoring of grants that have been awarded.

The second firm, Eide Bailly, using employees based in Nevada, set up a Fraud Inquiry Center website where anyone can file complaints or raise questions about potential abuse of the program. So far, based on use of the website, 11 complaints are under review about roughly 30 grants, Keeler said.

Keeler said the grant process was outsourced because the state was under a very tight timeline to distribute the federal COVID relief money and was able to use a firm that has experience in managing the programs.

To date, the state Coronavirus Relief Fund program has distributed more than $490 million in payments to 5,833 applicants that included small businesses, small nonprofits, acute healthcare providers, community providers, safety-net organizations and startups.

The small business portion of the program distributed the largest portion of funds. As of September 2021, the small-business program had distributed more than $302 million to 4,760 applicants.

The larger contract was for a maximum of $11 million with Guidehouse consulting of McLean, Va., for overall management of the COVID-19 relief grant programs. As part of its work, Keeler said Guidehouse was responsible for ensuring that paperwork filed by grant applicants was accurate and appropriate.

In a separate contract, the state is paying up to $980,000 to Eide Bailly to handle complaints of possible fraud or abuse of the program and to perform a random audit of paid grants in all four sections of the relief program.

The three main criteria that made small businesses eligible for state relief funds were that the business be located in South Dakota, be registered with the state or pay sales taxes, and show cash-flow losses of 15% or more due to the pandemic in two separate time periods in 2020, from March to August and September to November. Net losses supported by the state coronavirus grants were calculated after other COVID aid, including PPP loans, were factored in as income to prevent double-dipping from grant programs.

Citing privacy laws, Keeler declined to discuss or release paperwork on any specific individual grants or applications.

For the small nonprofit, small business and small start-up portion of the program, the firm will review the “eligibility determination, calculation of awarded funds as to amount, as well as the reasonableness of the recipient’s assertion that awards were used in accordance” with the state program guidelines. The firm said it will review all grants over $500,000, a random selection of 80 grants between $100,000 and $499,999 and a random selection of 115 grants under $100,000. All told, the firm will randomly review about 270 of the grants, or about 4.8% of the 5,621 grants in that section of the larger relief program.

The firm will also respond to any complaints filed through the state’s program website that allows anyone to file a report through a website link called “Report Suspected Fraud, Waste and Abuse.”

In addition to responses to the fraud website, auditors have found multiple other errors among applicants, Keeler said. As of late September, auditors found 30 grant awards that were underpaid by the state and had identified 143 applications that led to an estimated $4 million in overpayments.

The state so far has resolved 79 of those cases, with a total grant value of about $2.2 million, including about $500,000 that has been paid back to the state, Keeler said.

“Our objective is to try to correct these applications where we can as opposed to having them pay money back,” he said. “Most of these are simply mistakes … we’re not calling these fraud because we don’t know the intent of the mistake.”

So far, no criminal cases have been filed pertaining to the grant application or receipt processes, Keeler said.

Keeler said the reviews of grants and applications did not include site visits to businesses that were awarded grants.

“It was paperwork and phone calls and emails,” he said. “There was nobody on the ground running around knocking on doors or anything.”

Work by both contractors is expected to be completed by Dec. 31, 2021.

Keeler said that while the grant-distribution program was not perfect, he has a high comfort level that the taxpayer money distributed through the COVID relief programs in South Dakota was done efficiently and with sufficient oversight.

“We really tried to be as careful as we could and do it right, and I think if you look at how other states did this, compared to how we did this, I think you’d find that ours is a lot more careful and intentional,” Keeler said. “We think that South Dakotans are inherently quite honest, which is maybe why we haven’t seen so far a ton of things we need to look deeper into.”